The debate between property and shares
The age-old debate between property and shares is: which investment option generates higher returns?
There is a variety of factors to consider when choosing between the two, such as entry and ongoing costs, long-term returns and tax efficiency. Both forms of investment present benefits and risks which should be carefully analysed.
Property investment is generally more understood and considered to provide greater stability. Property values are generally less volatile than shares, and provide the investor with a greater level of control over their investment. Property also presents the opportunity to improve its value through renovation or development, which may result in higher long-term returns.
Due to high gearing, property may be the choice for some investors, as it is a favoured form of security for financial institutions and in some circumstances may be fully financed. There are tax deductions applicable for property investors such as the deduction of a depreciation component for building write off, and plant and equipment, which both improve the after-tax return.
Comparatively, shares generally have low entry, transaction and ongoing costs. Investors can start a share portfolio easily with low entry costs and access to online trading. Buying or selling shares involves lower transaction costs than property which involves stamp duty, inspections and legal costs. Also, shares involve substantially lower ongoing costs than property. Direct share ownership does not involve any ongoing costs in comparison to those property costs such as body corporate fees, insurance, land tax and repair costs.
Another feature is the high visibility and liquid nature of shares. Shares have a price that usually fluctuates daily and is easily monitored. This allows an investor to calculate the value of their portfolio at any time. Shares can be easily converted into cash as required, rather than property that is more difficult to sell quickly.
In the context of tax efficiency, many Australian shares provide franking credits with their dividends that may be used to offset the investor’s other tax liabilities. What this means is that share investors receiving dividends will get a credit for any income tax the company has paid. Taxpayers whose top personal marginal tax rate is less than the company’s tax rate will receive a tax refund on the difference.
Overall, it is advisable to seek investment advice suitable to your personal circumstances and investment needs.